Economic Update

At home, while income-oriented buying has boosted equities, it is now getting harder to find attractive investment options...

The past few weeks have been dominated by geopolitical uncertainty, particularly the prospect of a US-China trade war and its potential impact on global business activity: Equity markets have whipsawed as trade tensions have risen or receded. The other major development has been further declines in local and global interest rates to even lower levels....

Looking forward, the global business cycle, while still intact, is showing some signs of slowdown...

Interest rates have fallen to ever lower levels, benefiting both bonds (through capital gains) and equities (through improved absolute and relative valuation). Most of the impetus has come from central banks trying to get inflation to the levels they would prefer, but some (including in New Zealand) has also been insurance against potential economic slowdown....

Although the profit outlook for 2020 looks better, local equities are now expensive by both historical and international standards...

Cash and bond yields have dropped to new lows as central banks have sought to boost growth and inflation and as investors have sought safe assets like government bonds in a climate of high political risk from the US-China trade tensions. Lower yields have boosted the valuation attractiveness of equities, and income-oriented sectors like property and infrastructure have been in particularly high demand....

Looking ahead, the global business cycle still looks intact, though 2019 is shaping up to be a bit weaker than 2018...

Both equities and bonds have continued to do well this year. Although U.S. - China trade tensions have weighed on equities in recent days, investors in both local and global equities are still well ahead for the year to date, while investors in domestic and international bonds have also benefited from the capital gains created by largely unexpected falls in bond yields...